Category: Economics

Is Elon Musk one of the bigger winners from inflation?

by philg

Elon Musk gets paid more if Tesla’s market capitalization, revenue, and profit (using the fraudulent EBITDA number) rise, but the goals seem to be stated in nominal dollars, not real (inflation-adjusted) dollars. From Fortune:

Plainly the biggest driver of Tesla market cap is the baffling inability of mainstream car manufacturers to deliver a competitive product (they can’t even give us dog mode, a handful of lines of software for which an 18-year-old spec exists!). But what if investors are expecting the dollar to lose half or more of its value over the coming years of rule by Democrats? They’re throwing money into stocks, including Tesla, just to avoid holding the same type of cash that the government is printing like crazy. The revenue targets are easier to meet now that used car prices are rising (up 45 percent over a one-year period says New York Times).

How many other top executives are going to get a huge tailwind from inflation if this kind of nominal-dollar compensation plan is the norm?

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Inflation would be 10 percent per year if house prices were included

by philg

Ever wonder what the inflation statistic would be if it included some of the big purchases that people actually make, e.g., houses? A Wall Street economist, Joe Carson, recently wrote a piece on the current inflation situation:

Including house prices in the official consumer inflation statistics would lift the reported figure to roughly 10% and rival the early 1980s. Still, excluding the non-market shelter index from the official price statistics shows consumer price inflation running as hot as it did during the oil price spike of 2008. Both represent the fastest increase since the early 1980s, illustrating the breadth and speed of the current inflation cycle.

Other measures of inflation have already exceeded the reported figures of the early 1980s. Core intermediate prices for materials and supplies, which are part of the monthly producer price report, have jumped over 20%, well above the high readings of the 1980s.

If official government inflation is 6 percent, is it reasonable to say that 4% more would be added if actual house prices were included? From the same piece:

The initial signs of a new inflation cycle appeared in the housing market. In 2020, during the pandemic, house price prices rose 10%, according to the Case-Shiller. That was more than three times faster than the gain of the prior year and the most rapid increase since 2013. Some have argued that high and rising prices are self-correcting as buyers balk at the high prices. Yet, after increasing 10%, house prices posted a 15% increase, and the latest data shows a record 19.5% increase in the past year.

19.5 percent in this one component does seem as though it could translate to 4 percent for prices overall.

House prices in our neighborhood are so high that one homeowner has subleased the backyard to a research facility:

Related:

  • “Owners’ Equivalent Rent and Price Stability” (PennMutual): In 1983, the Bureau of Labor Statistics (BLS) made a change to an integral component of inflation indexes. The adoption of owners’ equivalent rent (OER) to estimate shelter costs meant home purchases would no longer be considered a consumption expenditure but instead a capital asset or investment. OER is determined by a monthly survey of consumers who own a primary residence. The survey asks how much consumers would pay to rent instead of own their home. OER represents approximately 25% of the Consumer Price Index and 12% of personal consumption expenditures (PCE). … Why has OER exhibited such stability versus market-based measures of shelter costs? Economists have observed that owner-occupied rental estimates tend to be “sticky” relative to market-based rental costs. Homeowners tend to underestimate rent appreciation during expansionary periods and overestimate it during recessionary periods. … The idea that home purchase costs are not an expenditure but an investment is likely difficult to understand for first-time homebuyers confronted with unaffordable housing options.
  • What if you want to live in your car (on “camping mode”) instead? Tesla prices were up about 10 percent in the past few months and went up another 5 percent today (Reuters)
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Does raging inflation prove or disprove Modern Monetary Theory?

by philg

Modern Monetary Theory is sometimes cartoonishly summarized as “government can borrow and print unlimited money without negative consequences so long as it issues debt in its own (printable) currency.” Based on this cartoon, what the U.S. government has been doing for the first 20 months of 14 Days to Flatten the Curve is exactly the right approach.

The Wikipedia summary of MMT is more nuanced. A government that issues its own fiat money

  1. Can pay for goods, services, and financial assets without a need to first collect money in the form of taxes or debt issuance in advance of such purchases;
  2. Cannot be forced to default on debt denominated in its own currency;
  3. Is limited in its money creation and purchases only by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment;
  4. Recommends strengthening automatic stabilisers to control demand-pull inflation[10] rather than relying upon discretionary tax changes;
  5. Bond issues are a monetary policy device, not a funding device.

(Note that the government’s stated inflation rate, alarming as it might seem, grossly understates costs to buy a house (real estate prices are not included) and also is not adjusted for delivery time (see Is inflation already at 15-30 percent if we hold delivery time constant?).)

One of the policy implications, according to Wikipedia:

Achieving full employment can be administered via a centrally-funded job guarantee, which acts as an automatic stabilizer. When private sector jobs are plentiful, the government spending on guaranteed jobs is lower, and vice-versa.

What we’ve seen over the 20 months of 14 days is sort of like “guaranteed jobs” in that people get a paycheck, but they don’t actually work (the paycheck is called “$600/week unemployment check,” resulting in higher-than-median wages for those who don’t work). On the other hand, the government has put most of its effort into making existing government jobs more lucrative. Government workers have gotten paid for not working (teachers who didn’t teach, librarians at home while libraries were closed, park employees at home while parks were closed) and more government workers, already earning salaries far above those in the private sector, won’t have to repay their student loans (funded by higher taxes paid by those who never enjoyed the opportunity to go to college). On balance, it seems reasonable to consider the higher-than-median-wage unemployment payments as the “centrally-funded job guarantee” that MMT proposes. And, in fact, as any employer trying to hire can attest, full employment was achieved (i.e., everyone who wanted a job had one).

Do you buy or sell stocks and real estate when the government is printing money?

MMT economists also say quantitative easing is unlikely to have the effects that its advocates hope for.[66] Under MMT, QE – the purchasing of government debt by central banks – is simply an asset swap, exchanging interest-bearing dollars for non-interest-bearing dollars. The net result of this procedure is not to inject new investment into the real economy, but instead to drive up asset prices, shifting money from government bonds into other assets such as equities, which enhances economic inequality. The Bank of England’s analysis of QE confirms that it has disproportionately benefited the wealthiest.

Let’s see if the MMT folks were right:

Check and check!

The primary inflation control mechanism in MMT, again according to Wikipedia:

Driven by fiscal policy; government increases taxes to remove money from private sector. A job guarantee also provides a non-accelerating inflation buffer employment ratio, which acts as an inflation control mechanism.

What are the Democrats who control Congress working on right now, as the headlines are filled with reports of raging inflation? Tax increases!

First, is it fair to say that MMT is actually the mainstream economic philosophy in the U.S. and has been since at least March 2020? (In other words, the folks who run the U.S. economy profess belief in neoclassical economics, but their actions reveal a belief in MMT.) Second, have the events that unfolded since then proven that MMT is correct?

Related:

  • “Rising Rents Are Fueling Inflation, Posing Trouble for the Fed” (NYT): rest assured that inflation is temporary, except that you’ll pay 10 percent more for at least the full year of your one-year lease (“That’s a concern for the Fed, because housing prices tend to move slowly and once they go up, they tend to stay up for a while. Rent data also feed into what is called “owners’ equivalent rent” — which tries to put a price on how much owners would pay for housing if they hadn’t bought a home.”)
  • “As Inflation Rises, Beware of the Money Illusion. It May Cost You a Lot.” (WSJ) (average people unable to comprehend that selling a house at a profit in nominal dollars is not a success when inflation has been higher than the profit)
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$112/month to live in a brand-new house in Bowie, Maryland

by philg

As part of our move to the Florida Free State, I had Everpresent scan a photo album that my mom made in 1966 (she didn’t use acid-free paper so there was no practical way to preserve it other than scanning).

Here’s the air-conditioned brand-new house that my parents purchased in Bowie, Maryland (my father was working as an economist for Census Bureau): $15,990 with $590 down and $112/month ongoing. (Deal was arranged in 1961, but the house was completed and they moved in 1962. It might have been the Cape Cod, actually, which was slightly cheaper.)

Zillow says that the median price of a single family home today in Bowie is about $500,000.

How does that compare to official inflation? $15,990 in June 1962 is worth about $145,000 today says the BLS. So a house is more than 3X as expensive in real dollars, despite the fact that the above (air-conditioned!) house was brand new. (Would $15,990 in today’s Bidie Bucks even pay for a central air-conditioning system (installed)?)

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Restaurants need to shift to electronic menus for real-time price adjustments?

by philg

From a barbecue joint in Boynton Beach, Florida: “due to the shortages of commodities within the market such as chicken wings, pork and also beef we must increase the prices from what the menu prices reflect until the market begins to normalize. … we hope to retain you as a customer as we navigate these unchartered waters.” [sic]

I find it fascinating that the folks who run this restaurant imagine that their costs will come back down (“normalize”) at some point in the reasonably near future. For places that aren’t as optimistic about our economic future, should they all switch to big screen TVs for menu display? Prices will need to be adjusted every month or two at the current rate of inflation, right?

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Express lanes: dumbness with concrete for a country that can’t be intelligent with electronics

by philg

As part of our escape to the Florida Free State, I drove our minivan down I-95 from Maskachusetts. Mindy the Crippler and I hit traffic in Virginia, associated with an I-95 Express Lane extension project (massive traffic jams now with the promise of clear sailing in the future).

A friend who is an expert on these matters told me that the entire concept was a terrible idea. “Adding two express lanes in the middle of a highway requires building two extra shoulders and lots of overpasses for the exits,” he pointed out. “It is spectacularly high cost compared to adding two lanes to the main roadway.”

In other words, instead of having two new express lanes, for the same cost we could build six new lanes on the main road.

What about the congestion and tolling angle? These new express lanes will require a fee to be paid (or an EZ Pass set to “HOV mode”). If we had gotten organized with in-car transponder electronics and a display reading “You’re now being charged 30 cents/mile,” we could just designate the leftmost lanes of a wider main road as toll-required express lanes. It should also be safer and easier to have the HOV mode set automatically by the car, e.g., with weight sensors on the seats or an in-camera camera that can count the number of occupants and subtract for canines. (Our 2021 Honda Odyssey, relying on weight sensor alone, gets upset when Mindy the Crippler sits in the front seat and is not belted.)

We’ll be fueling inflation by printing money to spend on infrastructure (see “Inside Biden’s $4.5 Trillion Infrastructure Plan”). If my friend is right about the off-the-charts dumbness of the highway-inside-the-highways express lane idea, I wonder if most of the $4.5 trillion will be wasted.

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Hidden car price increase: destination charge inflation

by philg

My mid-life crisis order from General Motors was pushed from the 2021 model year to the 2022 model year. There have been two price increases since the order was placed in January, but there is also a hidden price increase. The “destination charge” for getting the vehicle from the factory in Kentucky to the dealership has gone from $1,095 to $1,295, i.e., reflecting 18 percent inflation.

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Incentives and Coronapanic

by philg

In response to Recycle Chinese and Soviet anti-landlord propaganda to bolster support for Rochelle Walensky’s rent moratorium order?, Mitch wrote:

So getting vaccinated and slowing the spread increases one’s chance of having to pay rent. The incentives are not well aligned.

(The government says nobody has to pay rent in an area where COVID-19 transmission is occurring (90 percent of current renters covered). And they say that getting the vaccine will stop transmission (except that it doesn’t, according to the same government). Thus, it would be financially irrational for a community of renters to get vaccinated.)

“New Rule Raises Question: Who’ll Pay for All the Covid Tests?” (NYT) also raises a question of how people will respond to economic incentives:

Among the employers taking a different approach is Rhodes College in Tennessee: It will require unvaccinated students without a medical or religious exemption to pay a $1,500 fee per semester to cover the costs associated with a weekly coronavirus testing program.

To avoid paying $3,000 per year, in other words, an unvaccinated student need only get some card stock to feed into a laser printer and create his/her/zir/their own vaccination record. HIPAA would prevent the school from calling whatever “healthcare professional or clinic site” is written down on the record, right? In any case, on my CDC card, the clinic site information does not contain the full city/state nor any contact info. A college would have to be very motivated indeed to try to determine whether a vaccination card is genuine. The vaxyes service checks the lot number against the date of administration, but presumably this would also check out fine if the student copied the information from a virtuous friend who actually got the shots:

An initial review to ensure a match personal identification and vaccine card, vaccine dates make sense, lot numbers, and possible fraud markers.

If colleges want the unvirtuous to admit their thoughtcrime and unreasonable resistance to government pressure, wouldn’t it be smarter to offer the testing at no charge? Then the only incentive to forge a vaccine card would be avoiding the inconvenience and discomfort of weekly testing, not $3,000 in cash on top of that.

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How the Taliban can fund and run Afghanistan forever

by philg

“The Taliban Have Claimed Afghanistan’s Real Economic Prize” (NYT):

How exactly the Taliban plan to keep all systems running, in one of the poorest countries of the world that depends on more than $4 billion a year in official aid and where foreign donors have been covering 75 percent of government spending, is an urgent question. The state’s bankruptcy has tempted some Western donors into thinking that financial pressure — in the form of threats to withhold humanitarian and development funding — could be brought to bear on the new rulers of Afghanistan. Germany already warned it would cut off financial support to the country if the Taliban “introduce Shariah law.”

But those hopes are misplaced. Even before their blitz into the capital over the weekend, the Taliban had claimed the country’s real economic prize: the trade routes — comprising highways, bridges and footpaths — that serve as strategic choke points for trade across South Asia. With their hands on these highly profitable revenue sources and with neighboring countries, like China and Pakistan, willing to do business, the Taliban are surprisingly insulated from the decisions of international donors. What comes next in the country is uncertain — but it’s likely to unfold without a meaningful exertion of Western power.

One reason foreign donors inflate their own importance in Afghanistan is that they do not understand the informal economy, and the vast amounts of hidden money in the war zone. Trafficking in opium, hashish, methamphetamines and other narcotics is not the biggest kind of trade that happens off the books: The real money comes from the illegal movement of ordinary goods, like fuel and consumer imports. In size and sum, the informal economy dwarfs international aid.

For example, our study of the border province of Nimruz, published this month by the Overseas Development Institute, estimated that informal taxation — the collection of fees by armed personnel to allow safe passage of goods — raised about $235 million annually for the Taliban and pro-government figures. By contrast, the province received less than $20 million a year in foreign aid.

In other words, Afghanistan is in some ways like a super filthy version of Switzerland.

Also interesting, Antonio Garcia Martinez on recent events:

… the cream of American society and the flower of its finest universities, can only understand the world as projections of the country’s own domestic neuroses. Our current elites, whether in media or politics, squint at the strange peoples and languages of whatever international conflict and only see who or what they can map to their internal gallery of heroes and villains: Who’s the PoC? Who’s the Nazi?

And if the situation can’t be mapped, such as Afghanistan or the recent protests in Cuba, it’s utterly ignored for being just completely beyond human comprehension or concern.

This is the true privilege of being an American in 2021 (vs. 1981): Enjoying an imperium so broad and blinding, you’re never made to suffer the limits of your understanding or re-assess your assumptions about a world that, even now, contains regions and peoples and governments antithetical to everything you stand for. If you fight demons, they’re entirely demons of your own creation, whether Cambridge Analytica or QAnon or the ‘insurrection’ or supposed electoral fraud or any of a host of bogeymen, and you get to tweet #resist while not dangling from the side of an airplane or risking your life on a raft to escape.

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Our current economic situation highlights the disconnect between GDP and well-being?

by philg

The world economy is reasonably healthy, as measured by GDP. From the OECD:

This is small comfort to the poor, of course, who were predictably devastated when rich countries shut down (see If All Lives Have Equal Value, why does Bill Gates support shutting down the U.S. economy? (March 2020)).

But let’s focus on the comfortable. GDP per capita has taken only a minor hit, but maybe that just shows the limitations of using GDP per capita as a measure of well-being. After being deprived of the ability to travel, spend time with friends and relatives, play sports, go outside without wearing a mask, send children to school, etc., adults in rich countries still managed to produce, like prisoners eligible for daily work release.

Is life in the Age of Lockdown (except in Sweden, Florida, and South Dakota!) proof that GDP isn’t a good measure of well-being and overall quality of life?

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